Among the great modern investors, one name stands head and shoulders above the rest. For me, the world’s greatest investor is Warren Buffett, chair of US mega-conglomerate Berkshire Hathaway.
Warren Buffett (92 in August) has been investing in stocks since age 11. After 80+ years of outstanding returns, he has a personal fortune of $103.7bn. Yet he has donated over $49bn to good causes and intends to give 99% of his fortune to charity. Wow.
Warren Buffett loves owning insurers
Warren Buffett manages a diverse group of businesses under the Berkshire Hathaway umbrella. These include insurance companies, a major railway, a battery maker, clothing and jewellery firms, and fast-moving consumer goods businesses. Today, Berkshire is worth a whopping $655bn. But it’s well known that Warren Buffett loves the economics of insurance companies.
Indeed, one of four pillars of Berkshire Hathaway’s success is its various insurance subsidiaries. These companies collect insurance premiums upfront, but pay claims later. This generates a ‘float’ of cash and traded securities that gets invested to boost company returns. In 2021, Berkshire Hathaway’s float made the group $9bn. Nice.
“Price is what you pay; value is what you get”
Warren Buffett made the above comment in his 2008 letter to Berkshire shareholders. And I know that, as a value investor (like me), he loves to buy shares in quality businesses when they are discounted or on sale.
I’ve spotted one well-known, well-respected UK insurer that Buffett could buy on the cheap, presently valued at under £2.7bn. My ‘Buffett business’ is leading UK insurance provider Direct Line Insurance Group (LSE: DLG). For the record, my wife bought Direct Line shares in late July at an all-in price (including stamp duty and buying commission) of a whisker above £2.
Five reasons Buffett should buy Direct Line
Though I’m guilty of talking up my own book here, if I had a spare £3bn+ lying around, I’d happily buy Direct Line outright. In reality, any takeover bid would have to be pitched at a substantial premium to the current market value, but you see my point, right?
Here are five reasons why I’d urge Warren Buffett to snap up this FTSE 250 firm:
- Below £4bn is pocket change for Berkshire Hathaway, which has a cash pile of around $70bn (and growing fast).
- Direct Line has great consumer brands (including its famous red telephone on wheels) and over 13.2m policies in force across a wide range of competitively priced insurance products.
- It has a strong balance sheet, with a ‘solvency capital ratio’ 52% above the regulatory minimum.
- The company’s dividend yield of nearly 11.2% a year is one of the highest in the FTSE 350 index.
- Though this cash yield is covered only 0.9 times by trailing earnings, the group has no current plans to cut this payment.
Also, on the price/value front, Direct Line shares hit a 52-week high of 313.7p on 19 January, more than 50% above their current price of 203.4p. For me, Warren Buffett should run his rule over DLG before it gets more expensive. But storm clouds (inflation, energy bills, higher interest rates) are gathering over UK consumers and could harm corporate earnings, so I could well be wrong. Still, I have long-term hopes for this stock, so I may buy more shares!